FLXS Flexsteel Industries

Sector financial performance:

This company, who is primarily a manufacturer, importer, and marketer/wholesaler of upholstered and wood furniture, has been grouped into furniture – manufacture& wholesale sector in furnishing industry.

As manufacturers, companies have more flexibilities than design-only companies to control costs and lower price. Therefore, while sales volume declined in 2016, which is consistent with furniture companies in other sectors presenting a general competition factor across industry, the relatively strong demand for those companies’ products, as indicated by the averaged increase in sales volume of companies in this sector in the past several years, may be directly related with their relatively low price. Therefore, as market demand is getting stronger since 2017, we see the sale volumes jumping up from some of major companies. It is certainly possible that increase in ecommerce sales help offset the decreased demand from stores. The average increase in sales volume is 8%, 4%, -3%, and 4% in 2018, 2017, 2016, and 2015 respectively.

Obviously, companies felt the pressure from increasing costs and limited selling price of products as presented by the margins. The typical gross margin of companies has been seen down to about 22% in 2018. However, companies also managed to lower its average SG&A as percentage of sales and thus still are able to keep the operating margin unchanged at around 7% 2018.

The typical average stock Price/cash flow ratio: 17(interest/EBI ratio of 0%) and stock price/sales ratio is 0.8.

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Company performance:

It seems that the demand for products of this company in the past several years has been fluctuated as indicated by the increase in sales volume in 2015/16 and the second half of 2017 and decrease in 2016/17 and the first half of 2018. However, there is an upward trend in demand in market since 2017. As manufacture costs went up, this company has not raised price until 2018.

 The first nine months of fiscal 2018 compared with the same period of 2017

Sales increased by about 7% (5% for the third quarter) attributable to increases in unit volume from existing customers. ( new customers and price for third quarter).

Fiscal 2017 compared with 2016

Sales decreased by about 6.3% attributable to decreases in unit volume of residential upholstered and ready-to assemble products.

Fiscal 2016 compared with 2015

Sales increased by about 7.1% attributable to increases in unit volume of residential upholstered and ready-to assemble products.

Its gross margin has gone down by about 120 basis points to 22% in 2018 primarily due to increased labor and raw materials costs. However, with a SG&A as percentage of sales of 15%, its operating margin has been down to about 6% in 2018.

Stock price

This stock currently has enterprise price/EBI ratio of 16 ($38). We think that its stock is being relatively fairly valued considering that the weak demand from retailer for products of wholesale furnishing companies justify its relatively low multiple.